House Committee Votes 19 to 17 To Reduce Tax on Capital Gains

A divided House Ways and Means Committee approved legislation today to cut the tax on capital gains, handing President Bush an important political victory and setting the stage for a bruising fight on the House floor later this month.

The committee's 19-to-17 vote was an embarrassing defeat for one of the most powerful members of the House, Dan Rostenkowski, the Illinois Democrat who heads the committee. Mr. Rostenkowski hoped until the end to fracture an alliance between six conservative Democrats and all 13 Republicans on the panel. He repeatedly delayed a vote to avoid a floor battle that would pit Democrats against one another as well as against the Republicans and the Administration.

Those who want a lower tax rate on capital gains, as the nation had before the Tax Reform Act of 1986, assert that the lower rates encourage investors to trade assets like stocks, bonds and real estate more frequently. That makes more capital available to business for expansion or new ventures, they say. No Guarantee

Opponents contend that there is no guarantee that such capital will be productive and that the lower rates benefit the rich at the expense of the working classes.

Although the capital gains cut has Administration backing, it differs somewhat from the proposal first advanced by Mr. Bush in his 1988 election campaign. At the White House, Marlin Fitzwater, the President's spokesman, said, ''We are pleased by the vote, and we will be working hard to sustain it on the floor.''

The measure adopted today was written by a Democrat, Representative Ed Jenkins of Georgia. Democrats who opposed the cut, including Representative Richard A. Gephardt of Missouri, the House majority leader, directed their criticism at the President rather than members of their own party.

''This is Bush's folly,'' Mr. Gephardt said. ''This was George Bush's idea to help out his wealthy friends, and it was George Bush's efforts that made this happen today.'' 'Better Paying Jobs'

But Representative Bill Archer of Texas, the committee's senior Republican, praised the committee action, say-ing it would ''mean better paying jobs for more Americans.'' He disputed Democratic contentions that it was a boon for the wealthy. ''This cut will benefit family farmers, small businesses, timber interests and it will not add to the deficit,'' he said.

Earlier this week, Mr. Rostenkowski won agreement from the supporters of a capital gains cut for a limited alternative, but the liberals on the committee rejected the plan. They insisted that Democrats had no business supporting tax breaks that primarily benefited the wealthy.

That message became today's rallying cry for the House Democratic leaders, who pledged to seek defeat of the capital gains tax cut and to come up with an alternative that a majority of the party could support.

''What we did here is something for the wealthiest Americans that will eventually be paid for out of the pocketbooks of middle- and low-income workers,'' Mr. Gephardt said. ''It will raise the budget deficit, it will not help the economy, and it is not good tax policy.''

The Jenkins measure would allow investors to ignore 30 percent of their profit on sales of assets in calculating their taxes, if those assets are held more than one year and sold between Sept. 14, 1989, and Dec. 31, 1991. Capital gains are currently taxed at the same rate as ordinary income, which is 28 percent for most taxpayers. The exclusion would temporarily have the effect of reducing their capital gains rate to 19.6 percent. Adjusting for Inflation

Once the tax break expires, investors who sell assets acquired after Dec. 31, 1991, would not be taxed on the portion of any profits attributable solely to inflation. This procedure, known as indexing, was part of Mr. Rostenkowski's compromise plan, and committee Democrats said it might well be incorporated in the alternative Democratic leaders present on the House floor.

The cut in the capital gains rate is part of a larger tax bill that is expected to raise $6.9 billion in the 1990 fiscal year that begins Oct. 1, more than enough to satisfy the tax committee's obligation for the deficit reduction package that Congress must pass in the next month.

The tax bill includes enhanced tax credits for child care, reductions in the surtax that Medicare recipients pay for insurance against the catastrophic costs of serious illness, and extension of a variety of popular tax breaks that have expired or are due to expire at the end of the year. It effectively repeals a much-disputed requirement that employers not discriminate against lower-paid employees and retirees in health-care plans, and it restricts the tax advantages of some leveraged buyouts.

To offset the bill's revenue losing measures, the bill includes higher benefit premiums for Medicare recipients, a new excise tax on ozone depleting chemicals, extension of the telephone excise tax and a speedup in the collection of payroll taxes for large companies.

Crafting an alternative to the committee measure that is acceptable to an array of Democrats and at the same time is attractive enough to scuttle the capital gains cut will be no easy task. Perhaps a third of the House Democrats favors some cut in the capital gains tax, including traditionally liberal lawmakers from states with sizable timber interests and family farms. People in these enterprises would stand to benefit from lower capital gains taxes.

In a rehearsal of the intraparty bargaining to come, committee Democrats today offered a series of amendments to the Jenkins plan. These measures, all defeated, would have aided lower-income taxpayers and restored the right, in general, to deduct contributions to individual retirement accounts from taxable income. They would also have raised the top tax rate on the wealthiest Americans to 33 percent from 28 percent. The intention was to match the rates paid by some upper-middle-income taxpayers, who are caught in what is known as the ''33 percent bubble'' because of a 5 percent surcharge. 'Middle-Class Massacre'

''It was a middle-class massacre,'' said Representative Thomas J. Downey, Democrat of Long Island, as he emerged from the closed session in which votes were taken today. Mr. Rostenkowski was equally angry.

''Amendments dedicating some of the proceeds of this plan to drug enforcement and deficit reductions were rejected,'' he said. ''Over and over again, sometimes through tie votes, a bare majority of the committee decided that a tax cut for the wealthiest of Americans is more important than any other economic issue.''

Mr. Rostenkowski, who avoided reporters and issued a written statement after the vote, said it would be ''a financial disaster to this country.''

''Today's action, which could be a first step in the unraveling of tax reform, is the ultimate expression of feel-good economics,'' he said. ''The President and his supporters want the American people to believe that there is no price to pay for this tax giveaway. In just a few years, the people will find out just how misguided this plan is.''

The six Democrats who sided with the Republicans in support of the capital gains tax cut were Mr. Jenkins, J. J. Pickle of Texas, Mike Andrews of Texas, Beryl Anthony of Arkansas, Andrew Jacobs of Indiana and Ronnie Flippo of Alabama. Renewed I.R.A.'s

Among the alternatives, the proposal that seems to be gathering the greatest momentum is to restore the deduction for contributions to I.R.A.'s. Senator Lloyd Bentsen, the Texas Democrat who heads the Senate Finance Committee, advanced the idea earlier this week, arguing that it would encourage the saving needed to assist capital formation in the United States while conferring a tax benefit on a far broader segment of Americans than a capital gains tax cut.

''The Bentsen proposal is popular among Democratic members because it is the kind of political cover that everybody needs,'' one Ways and Means Committee aide said. ''You can be against capital gains and for the middle class, and that is the perfect place to be.'' Highly Charged Debate

The highly charged political debate over the capital gains cut has largely obscured the longstanding economic arguments on the issue. Proponents of a cut contend that taxing profits from investments at a lower rate than ordinary income encourages people to buy stocks, bonds, real estate and the like, thereby making more capital available to business, so that it can expand or develop new products.

In a statement issued after the capital gains vote, Treasury Secretary Nicholas F. Brady touched on those themes, praising the committee action as ''a major step forward in providing incentives for long-term investment in the United States.''

An error has occurred. Please try again later.

You are already subscribed to this email.

Opponents of the capital gains cut argue that without impossibly complicated regulations and restrictions, there is no guarantee that investment money will flow to productive businesses or high risk ventures, where capital is most needed. The two sides also differ over the long-term impact of a capital gains cut on the Federal budget deficit.

While there is general agreement that the initial wave of buying and selling by investors to take advantage of the lower rate will bring money in to the Treasury, there is considerable disagreement about whether the lower tax rate will eventually mean lower or higher revenues. By AGIS SALPUKAS

After a two-week battle, a $6.75 billion bid that would make United Airlines the nation's largest employee-owned company was approved last night by the parent company's board.

The directors of the UAL Corporation accepted the $300-a-share offer from a group that includes pilots and top executives at the airline, the nation's second largest, and British Airways. A rival bidder, the investor Marvin Davis, apparently dropped out earlier, people familiar with the bidding said.

The deal still needs the approval of shareholders and the Department of Transportation. Little resistance is expected, but the Transportation Department has in the past raised concerns about foreign carriers buying into American airlines. 'The American Perestroika'

Under the proposal, British Airways would end up owning 15 percent of the company, the management group 10 percent and the other employees 75 percent.

Analysts said the buyout would be a milestone in relations between American labor and management.

''This is the American perestroika,'' said Gene Keilin, a general partner at the investment banking firm Lazard Freres & Company who helped assemble the deal, comparing it to the economic reorganization in the Soviet Union.

Analysts predicted yesterday that other airlines and big companies might become candidates for buyouts led by unions and management to prevent outside investors from gaining control. Employees Not All Owners

But experts on employee-owned companies said that teaming up on a buyout might be the easy part. They predicted that conflicts and problems would come not only at the management level, where executives and union leaders will have to work together, but also at lower levels, where attempts would be made to motivate the pilots and possibly other workers involved in the deal to improve productivity and involve them more in running the company. [ Page D5. ] One of the biggest problems facing the new company may be that not all employees will become owners. Stephen M. Wolf, chairman and president of UAL and a member of the group whose bid was accepted, said all of the more than 60,000 UAL workers would be invited to participate in a stock ownership plan.

But so far, United's more than 20,000 machinists, who have been at odds with its 6,100 pilots over the future of the company, have refused to participate in the takeover. United's unionized flight attendants opened negotiations yesterday about entering the buyout.

After the deal, the company's 15-member board would reflect the diverse ownership. At least eight members would be independent of any of the buyout groups. Management would appoint three directors, the participating unions would choose three and British Airways would appoint one.

Unlike other companies in which employees gained ownership, UAL is not struggling and does not need such a buyout as a last resort. Instead, UAL is a strong, profitable company, and it had an offer from a wealthy investor in Mr. Davis.

''This is by far the largest deal in which employees are buying a highly profitable company,'' Mr. Keilin said.

Mr. Davis started the bidding for the company, and his most recent offer was for $275 a share. But he could not win concessions from other unions to match those the pilots had offered in their proposal for the company.

The stake that would be held by British Airways reflects the rising number of international agreements in the airline industry and the trend toward creating airlines without national identities.

The buyout would also make United Airlines more competitive, because of concessions on wages and benefits by United's pilots. Other carriers may be forced to lower their own costs.

The takeover group has obtained $3 billion in financing from banks led by Citicorp and the Chase Manhattan Bank. The group must still raise another $4.2 billion to meet the buyout sum and cover debt. But both Citicorp and Chase said they would be able to raise the rest of the money.

Sharon Kalin, an arbitrager who has followed the deal closely, said the group would have no problem getting the rest of the money because banks are eager to lend in a takeover of a profitable American company whose cash flow comes mostly from the United States.

UAL said it would begin a tender offer for all the outstanding common shares of the company at $300 a share in cash beginning Sept. 21.

The company also said its managers and advisers would be available for inquiries by other investors who may want to bid for UAL, but as of last night no other bids were expected.

Mr. Davis, who had indicated earlier that he might want to raise his bid, was considered to be unlikely to stay in the bidding after the board's action yesterday.

Jim Fingerorth, a spokesman for Mr. Davis, said the investor would not have any comment on the UAL board's action but would make a statement today. British Airways Meeting Set

Colin Marshall, president and chief executive of British Airways, which is participating in the pilot-management group offer, met with analysts in New York yesterday and outlined the advantages that an alliance with United would provide for both carriers.

British Airways has agreed to put up $750 million of the $1 billion of equity in the proposal. In addition to getting a 15 percent interest in UAL, it hopes to find other ways for the two carriers to cooperate - in maintenance and flight scheduling, for example.

A spokesman for British Airways said Mr. Marshall had told analysts that the carrier would hold a special shareholders' meeting in the first half of October to vote on the buyout.

We are continually improving the quality of our text archives. Please send feedback, error reports,
and suggestions to archive_feedback@nytimes.com.

A version of this article appears in print on September 15, 1989, on Page A00001 of the National edition with the headline: House Committee Votes 19 to 17 To Reduce Tax on Capital Gains. Order Reprints|Today's Paper|Subscribe